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New book asks if Iraq is its own worst enemy

“Iraq,” says Frank Gunter, “is an island of sand floating on a sea of oil.”

In the aftermath of the U.S.-led war that ousted Saddam Hussein, Iraq is also a land of youth and great potential, and a culture of corruption and contradiction whose major resource could become its biggest obstacle.

Between 2005 and 2009, Gunter spent 25 months in Iraq, serving as military chief of the Economics Section for the Multinational Force and then as senior civilian economics adviser to the Multinational Corps.

His book, he writes, “is an attempt to write the book that I wish I had read before getting off the plane in 2005.” What he had missed, he says, was an integrated analysis of the whole of Iraq’s economy.

Four years after completing his second tour of duty in Iraq, Gunter retains a fascination with the land once called Mesopotamia, the cradle of civilization between the Euphrates and Tigris Rivers. Economics has been dubbed “the dismal science,” but Gunter’s observations are filled with vivid anecdotes about people, culture and customs.

Oil, both blessing and curse

Corruption and an overregulated private sector are a twin threat to Iraq’s economic future, he says, and they are intertwined. Overdependence on oil is a possible peril.

“Iraq ranks fourth or fifth among the world’s nations in proven reserves of oil,” Gunter says, “and 90 percent of the country hasn’t even been explored yet. Iraqi oil is cheap to access; it costs only about $10 per barrel to get it out of the ground and onto a ship.

“But when a country’s economy is dominated by a single natural resource, that can be a curse. What happens is the reverse of ‘no taxation without representation.’ If the government doesn’t need people to pay taxes, it doesn’t need their approval and can afford to ignore them. The chances of establishing a vibrant democracy are very low.

“Ninety percent of the government’s revenue comes from oil. The government owns the oil fields and pipelines. And it spends most of its revenues on wages and pensions for government employees.”

Iraq is not the world’s most corrupt nation, Gunter says, but it ranks with the worst. Government ministers embezzle millions while village merchants replace good grain with bad when feeding the poor. A quarter of the employees in some government offices are “ghost workers” who show up only to collect a paycheck—and pay off the cousin or uncle who hired them. Featherbedding is rampant: Iraq’s railroads, by some estimates, employ five to seven times more people than necessary to do the job.

A beleaguered private sector

Meanwhile, hostility from government regulators makes it virtually impossible for the private sector to operate—legally. Bribes and kickbacks are a fact of life for those seeking a license to start a business or export a product.

Despite its problems, says Gunter, Iraq has an enviable position among the world’s developing countries. Literacy is high, and the fertility rate of 3.9 children per woman, more than twice that of neighboring Iran, bespeaks a nation optimistic about the future.

What could threaten that future? Violence has increased since the U.S. ended its military presence two years ago. Relations among Kurds, Sunnis and Shi’ites remain tense. Unemployment and underemployment among young Iraqis exceeds 80 percent, and the job market adds 250,000 people a year. A hostile business environment stifles the creation of private sector jobs.

Gunter worries about oil. “The ruin of Iraq could occur in one of two ways,” he says. “If world oil prices fall below $55 a barrel, that might make it impossible for the government to continue buying loyalty from its citizens.”

Conversely, if Iraq achieves its unlikely goal of producing 10 million barrels of oil a day by 2017, and if oil prices stay above $100 a barrel, complacency could persuade Iraq that it need not diversify its economy or tackle corruption.

Gunter proposes a seven-point plan for Iraq’s future: streamline oil production and exports, reduce corruption, enact regulatory reform, boost literacy and education, restructure the exchange rate and finance systems, adopt a rational water pricing policy, and decentralize many government functions.

Iraq, he says, has little margin for error.

“Over the next decade, Iraq will have to make a series of tough political and economic decisions. Rich countries with long histories of stable government can afford to make stupid decisions. Iraq cannot.”